UK unemployment is at its highest point for four years while slowing wage growth and falling vacancies illustrates the labour market continues to struggle after chancellor Rachel Reeves’s tax hikes on business.
The data, which shows high unemployment, few vacancies, and disappointing wage growth, will be closely watched by the Bank of England’s monetary policy committee when considering whether or not to lower interest rates.
The rate of unemployment for those aged 16 and over rose to 4.7% in May, the highest it has been for four years, and well above pre-pandemic levels, according to new data from the Office for National Statistics (ONS).
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New data also shows the jobs market is weakening with more people being made redundant and fewer new vacancies being posted.
The number of payrolled workers in the UK fell by 135,000 (0.4%) in the year to May 2025, and was down by 68,000 (0.2%) in the three months to May.
The number of vacancies in the country also fell again by 56,000, to 727,000, in April to June 2025.
This is the 36th consecutive month where vacancies are lower when compared to the previous quarter, with the ONS saying that there are fewer jobs in 14 of the 18 industry sectors that it divides the UK economy into.
This indicates that firms in the country are not recruiting new workers, or that they may not be replacing workers who left the company, say the ONS.
The new data comes some months after Reeves’s decision to raise employer National Insurance contributions in April 2025, making it more costly for firms to hire and retain employees.
Some experts warned the policy could harm the UK’s labour market and suppress the availability of jobs; the new data from April seems to indicate that, at the very least, the policy has not helped the UK labour market recover from shocks sustained during the pandemic.
Alice Haine, personal finance analyst, Bestinvest, said “the jobs market is showing signs of strain as the changes, first announced by the Chancellor at her maiden Budget last October, saw employers reevaluate hiring and wage plans.
“April’s spike in utility bills heaped further cost pressures on businesses while lingering global economic uncertainties, caused by volatile trade conditions and geopolitical tensions, continue to cast a shadow over employment prospects,” she added.
Lindsay James, investment strategist, Quilter, added: “Recruiters have reported falling vacancy levels, rising candidate availability, and weaker wage pressures, all of which point to a jobs market that is gradually rebalancing after a period of acute tightness.”
Wage growth continues slowdown
Alongside a slowdown in the labour market, workers in Britain have also seen a decline in how much their wages are growing in the three months to May.
Annual growth in average weekly earnings was 5% for both regular earnings and total earnings (which includes bonuses), a decline from the previous three month period.
Regular earnings fell by 0.4 percentage points from 5.4% in the three months to April to 5% in the three months to May.
A slightly more muted fall can be observed in the figures for total earnings, which fell by 0.3 percentage points from 5.3% in the last three month period to 5% in May.
When adjusting these figures for inflation, which unexpectedly jumped to 3.6% in June, and was reported as 3.4% in May, pay growth looks incredibly paltry.
Real-terms regular earnings grew by just 1.1% in the three months to May while real-terms total earnings grew by just 1% in the same period.
As for the sectors where pay is growing the fastest, pay in the private sector was 4.9%, while pay in the public sector is considerably higher, at 5.5%, following the government’s inflation-busting pay rises for public sector workers.
Slowing wage growth can significantly impact household finances, especially if pay growth dips below inflation, as earners will start paying more of their pay packets on household bills, and will have less money to save, pay down debt, and maintain their living standards.
What does a slowdown in the labour market mean for interest rates?
In an interview with The Times, the governor of the Bank of England Andrew Bailey said a pronounced slowdown in the labour market could spur the Monetary Policy Committee (MPC) to make larger interest rate cuts at their next meeting.
The MPC has cut interest rates four times since July 2024 at a broadly quarterly rate, and decided to keep the base rate at 4.25% at its last meeting.
The committee’s next meeting will be on 7 August, with some analysts expecting a cut – the likelihood of this seems to have increased following the poor labour market statistics.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “The Bank of England was hoping for bad news from the labour market, and it got what it wanted: wage growth has slowed and unemployment has risen again.”
This is what the central bank was looking for because a slowing labour market is a disinflationary pressure on the economy. As interest rates are used to keep inflation down, having other disinflationary pressures elsewhere allows the MPC more flexibility to make faster and larger rate cuts.
James at Quilter, agrees that the central bank will be “watching these numbers closely,” but notes that the Bank will be especially vigilant in light of June’s inflation figures, which showed a slight uptick in headline CPI to 3.6%.
“With inflation still above target but labour market conditions loosening, the Bank faces a delicate balancing act. Markets had been increasingly pricing in a rate cut as soon as August, but yesterday's inflation surprise may temper those expectations.”
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